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re: What is the purpose of swaps?
Posted on 1/18/13 at 3:39 am to foshizzle
Posted on 1/18/13 at 3:39 am to foshizzle
quote:
Often it is more insurance than hoping someone else is wrong.
This is true. These types of instruments improve markets on a macro level in two ways: (1) by helping parties hedge risk, and (2) by adding information to the system. But I think most volume comes from (1).
And even for "directional" trades that fall into category (2), where hedge funds and proprietary trading desks try to beat the market with their own ideas, they will often need to hedge their trades with swaps so as to limit their risk to whatever their core profit trading idea really is.
And don't forget volatility/variance swaps...
Posted on 1/18/13 at 7:17 am to Doc Fenton
The plain vanilla swaps are basically a smoothing mechanism to the macro economy.
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